Which supermarket stock will be the winner this Christmas?

Which supermarket should you invest in ahead of the key Christmas trading period?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Christmas is make-or-break for retailers. A successful festive season can not only boost their top and bottom lines, but also improve investor confidence over the coming months. This year, trading conditions for supermarkets in particular remain tough, with a very high level of competition.

Furthermore, consumer confidence remains under pressure and is at its lowest level since the EU referendum. As such, it could be a challenging period for the likes of Tesco (LSE: TSCO), Morrisons (LSE: MRW) and J Sainsbury (LSE: SBRY).

Cross-selling opportunity

Of course, Sainsbury’s now owns Argos and this should provide a boost to the company’s Christmas performance versus previous years. However, since Argos is a much more cyclical business than food retailing it may suffer to a greater extent than its more defensive, food-focused rivals. As such, Sainsbury’s could struggle to post positive numbers for the festive period even though comparables are unlikely to have been particularly strong.

Looking further ahead, the integration of Argos stores is likely to be relatively smooth. It complements Sainsbury’s current offering and both companies could benefit from the cross-selling opportunities that are on offer. Although Sainsbury’s is forecast to post a fall in earnings of 12% this year and 2% next year, its price-to-earnings (P/E) ratio of 11.7 indicates that it offers good long-term value for money.

A more efficient business

Tesco should enjoy a more prosperous festive trading period than in previous years. It has become increasingly efficient and more focused on its grocery offering. This should allow it to compete more effectively on price with budget operators such as Aldi and Lidl, which in previous years have snatched sales from their larger rival.

With it forecast to increase its earnings by 171% this year and by a further 33% next year, it has a bright medium-term outlook. Its price-to-earnings growth (PEG) ratio of 0.7 indicates that it offers better value for money than Sainsbury’s, which alongside an improving business model makes Tesco the superior buy.

Clearly, there’s more to come from its turnaround programme. Its decision to focus on the UK rather than international expansion could prove to be the wrong one due to sterling’s weakness and the difficult outlook for UK consumers. However, given its wide margin of safety, it remains a sound long-term buy.

Overvalued despite a bright future?

Morrisons also has good prospects. Its value proposition should resonate well with consumers this Christmas given the downbeat outlook for the sector. Its strategy is likely to be highly effective in future years, since it’s leveraging its status as a major food producer to supply Amazon in its home delivery venture. Morrisons’ decision to return to convenience store shopping via the Safeway brand could also boost its earnings in what is likely to remain a growth area over the medium term.

Despite Morrisons being forecast to increase its bottom line by 10% this year, its shares lack appeal compared to Tesco and Sainsbury’s. Morrisons trades on a PEG ratio of 2.1 and has a P/E ratio of 21, which makes it much more expensive than its rivals. As such, its peers seem to be better buys for long-term investors, with Tesco offering the greatest appeal of the three companies.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Morrisons, Sainsbury (J), and Tesco. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »